8@eight: ASX set to follow US lower amid global uncertainty

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By John Kicklighter, Tyler Yell

14 March 2018 — 7:02am

The ASX looks set to open lower, taking its lead from Wall Street, where all the major indices headed into the red amid uncertainty after the ousting of US Secretary of State Rex Tillerson ahead of delicate talks with North Korea.

While the markets were notably free from explicit trade war escalation rhetoric this past session, concern nevertheless has imposed restraint on risk taking. The United States' announcement of its steel and aluminum tariffs last week has global investors and political leaders extremely uneasy about what the future holds. If President Trump commits to the aggressive taxes on foreign steel and aluminum, the chances of retaliation driving forward a growth-killing trade war are high.

In advance of its meeting next week on March 19 and 20, the G20 released a draft communique calling on commitments to avoid protectionist policies – essentially calling on its members to abide by the commitment they made at the Hamburg summit last summer. There is much to lose given the stretch in speculative interests across the globe and the explicit dependency on stable markets. Yet, we should also consider what is there to gain should this situation not turn malignant. Would avoiding a trade war open up meaningfully robust forecasts for the future or find key assets at deep discount?

Wall Street: Aside from the optimism that opened the trading day on Tuesday, there seemed little appetite for equities and other high-return assets through the New York session. All the major US indices were in the red heading into the close, with the largest losses since the beginning of the month. That is less a statement on the pace of Tuesday's session, however, and more a reflection of the buoyancy of the past two weeks. The S&P 500 and Dow have struggled with lift well before returning to their record highs of late January while the Nasdaq reclaimed its summit on Monday. Technical milestones (resistance breaks, record highs) are only steps upon the path. Investors are looking for the follow-through that would theoretically take over, but that requires conviction. And enthusiasm is lacking in these already richly priced and increasingly tumultuous times.

Monetary policy competing for headlines: For much of the past decade, global monetary policy has been responsible for much of the trend development in capital and FX markets. Yet, its influence has notably deflated over the the past year. This past session, the US consumer inflation report essentially met expectations of a 1.8 per cent headline and 2.2 per cent core pace, which offers modest pressure for the Fed to pursue a particularly aggressive pace of normalisation. Nevertheless, the market is still pricing in three rate hikes – and weighing a possible fourth – according to swaps, at the same time that the dollar lists at three-year lows. Perhaps the key ingredient is opaqueness and speculation. The Fed's bearings are clear, but the ECB's are not. On that front, President Mario Draghi's remarks coming up may hold more weight towards volatility for EUR/USD should it verify reports at the end of this past week that the central bank weighed an option that called for full QE taper by year's end and a rate hike by mid 2019.

Canadian dollar drops: Last week, the Canadian dollar managed a remarkably strong bounce. A near constant barrage of dour updates on the lack of progress in NAFTA negotiations, new US tariffs and a diminished rate forecast for the BoC has driven the currency sharply lower against all of its major counterparts. Yet, when it was reported that the US had granted exemption from its steel and aluminium tariffs from the start, there was a clearing for bulls to bid up a depressed Loonie. Yet, we have seen that fervour crushed this past session by BoC governor Stephen Poloz. The policy official suggested trade was adding to his concerns about the future for Canada and thereby the chances for a speculative tempo for rate hikes moving forward. The Canadian dollar was this past sessions worst performing major by far.

DAX underperformance: The Germany DAX has become a persistent underperformer when looking to global equity indices. On Tuesday, the DAX Index fell 1.8% to 12,199 and fell by the most since the March 2 drop of 2.3%. The DAX has had difficulty with the increase of borrowing costs - though still low in relative terms - in the exporter-focused Germany alongside the EUR on the inevitable end of quantitative easing by the ECB. So far, the DAX is down by 5.6% in 2018 and still 10% below the 52-week high reached on January 23. After exemptions were handed to Canada, Australia, and Mexico; Europe appears to be in the cross-hairs of the tariff's signed in by US president Trump, which could cause more pain for the German 30.

ASX200: The ASX200 fell with heavy breadth where 128 of 200 shares were sold to take the index below the 50-day moving average in the last session. The 21.4 point drop or 0.4% was counter to the MSCI AC Asia Pac Index which gained 1.7%. The largest single decliner in the prior session was Australian Agricultural Co, which fell 4.1% and is set to be removed from the ASX on March 19. Tuesday's drop took the index further in the red for the year to the tune of 1.5%.

Commodities: Raw materials prices turned lower as the ECB-inspired drop in the EUR/USD exchange rate echoed as broad-based US Dollar strength around the financial markets. The cross accounts for nearly a quarter of all FX market turnover, so it is not unusual that the greenback's performance here would have knock-on effects on its value against other currencies and raw materials.

Australian dollar: With the exception of the pummelled Canadian currency, the Australian dollar was Tuesday's worst performing 'major'. Traditional data over the past 24 hours has offered a mixed view of an already uncompetitive fundamental backdrop. The positive investment lending statistics competed with the weak showing in home loans and the business sentiment survey from NAB competed with itself (a rise in current conditions but slide in expectations). Ahead, we will have consumer inflation expectations for March. Technically speaking, this could alter RBA rate forecasts; but markets have grown remarkably cynical that the central bank has any intention of raising rates to revive the Aussie's carry prowess.